NAB’s Chief Economist, Alan Oster provides his thoughts on the Australian and Global economy.
Confidence and conditions tick up.
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Both conditions and confidence saw a small improvement in the month, though the latter remains well into negative territory, reflecting a sharp deterioration in Victoria and more generally, the degree of uncertainty in the economy as lockdowns persist and the timing of a full re-opening remains unknown. That said, business conditions are still elevated – and rebounded in both NSW and SA in the month – and remain well above average in all states. While there has clearly been some deterioration in the survey from early 2021, the deterioration in confidence and conditions, as well as capacity utilisation has not been as severe as early 2020 despite the severity and duration of lockdowns in the two largest states. In addition, forward orders are back to being well above average and capex despite pulling back from the levels seen in early 2021 is around average. The resilience of the survey during the current episode likely reflects the healthy momentum in the economy before the lockdowns, ongoing fiscal and monetary support as well as greater certainty that the lockdowns will end as vaccines roll out. While we expect a large hit to activity in Q3, the survey supports our view that once restrictions are eased, activity will rebound. Beyond the rebound, healthy business investment and hiring will need to be maintained to see ongoing growth in the economy – and for now, investment intentions and job vacancies continue to point to ongoing growth.
Business conditions rose by 4pts to +14 index points in August after declining sharply over the previous two months. Improvements in the trading (up 7pts) and profitability (up 10pts) sub-indexes drove the result, while employment edged down further (down 2pts). The result saw business conditions remain elevated above their average across all states.
“While lockdowns in NSW and Victoria and shorter disruptions across other states continue to impact businesses, trading and profitability conditions improved slightly in August. Overall conditions improved 4pts, indicating some resilience in the economy under difficult circumstances,” said Mr Oster.
“Conditions improved noticeably in NSW as well as in South Australia in August – two states that experienced sharp declines the previous month – but deteriorated somewhat in Queensland and Tasmania, while conditions in Victoria and Western Australia were largely steady,” said Mr Oster.
Business confidence also improved slightly, up 2pts to -5 index points. Confidence remained low or negative in NSW, Vic and Queensland, and across most industries, with confidence declining even in mining and construction after these had previously held up. Confidence improved somewhat in NSW but declined in Victoria, leaving both states deep in negative territory.
“Confidence remained at significant lows in August, reflecting the heavy toll of restrictions. The two largest states moved in opposite directions, with confidence improving somewhat in NSW as the vaccine roll out picked up pace but deteriorating in Victoria as lockdowns were extended. Still, the falls in confidence have not been as severe as those seen in 2020, with the availability of vaccines providing some reason for optimism,” said Mr Oster.
Forward orders rebounded from negative territory, up 11pts to +6 index points for the month, led by the retail, wholesale, and transport and utilities industries. Capacity utilisation (80%) softened further, but has not deteriorated as significantly as early 2020 while reported capex (7 index points) was steady.
“Forward orders rebounded in August after a very weak result in July, and capex also remains at a relatively solid level. These are encouraging signs that businesses may see some light on the horizon,” said Mr Oster.
“While the sustained lockdowns now in place will cause a large hit to activity in the quarter, the resilience seen in the August survey results suggest that the supports in place, and lingering momentum from earlier in the year, are continuing to support the economy” said Mr Oster.
“There are also signs that progress on the vaccine rollout and growing certainty that lockdowns will end in coming months are providing a reason for optimism. The economy remains well positioned to rebound once restrictions are eased,” said Mr Oster.
For more information, please see the NAB Monthly Business Survey (August 2021)
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